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The Lock-In Effect and Keys to Success

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By Rick Tobin

There sure seems to be more bad news than good news these days about the state of real estate. During turbulent times like we’ve all seen in recent years, the most common first human reaction is usually denial or acting somewhat like a locked up “prisoner” with a frozen “deer-in-the-headlights” look in our eyes. Yet, this is exactly when we should stay focused on the potential opportunities more so than the temporary obstacles standing in our way.

As foreclosure filings continue to increase to an average near 50% higher than the pre-pandemic years (2019 and earlier), struggling homeowners and landlords will need to focus on solutions such as loan modifications, forbearance agreements, short sales, and quick sales for cash. As an investor in the near future, you will likely find more deals readily available to choose from if you know where and how to look for them.

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Some metropolitan regions like Houston have 56% higher foreclosure rates. Other places like Minneapolis/St. Paul saw +106% foreclosure rates in March. Nashville was +35% higher and Phoenix + 33% higher in May; Rhode Island was up 32% in May.

During the depths of the Credit Crisis / Great Financial Recession years between 2008 and 2013, California was hit the hardest with a -41% home price drop average from peak to trough. Nevada, Arizona, and Florida weren’t too far behind.

Some California home prices have risen as much as +41% over a period of just 18 to 24 months in recent years, so an equivalent -41% price drop is easier to imagine as some values may drop back towards 2021 levels.

The typical home today is about $80,000 higher than it was just two years ago. The average monthly rent payment today is more than $1,000 higher than it was in 2020. Middle-income first-time buyers are unable to afford 70% of homes. As California unemployment rates continue to rise at a faster pace than most other states (Big Tech layoffs, especially), it will be more challenging to continue making mortgage payments.

Rental Market Trends

Today, there are 65% more active short-term rental listings on Airbnb and VRBO (965,000+) than all homes listed for sale nationally (554,000+), as per Realtor.com and other sources. At some point, the vacant short-term rentals will become listed homes for sale or distressed properties due to higher vacancy rates.

Ironically, the founders of Airbnb originally used air mattresses to cover their own San Francisco apartment unit’s rent. Eventually, air bubbles go pop one way or another.

Rent Increases

The following metro areas have experienced the greatest year-over-year rental price percentage increases through May 2023:
Providence-Warwick, RI-MA (+17.44 percent)
Kansas City, MO (+13.20 percent)
Minneapolis-St. Paul-Bloomington, MN-WI (+8.97 percent)
Raleigh-Cary, NC (+8.05 percent)
Charlotte-Concord-Gastonia, NC-SC (+7.65 percent)
San Jose-Sunnyvale-Santa Clara, CA (+7.59 percent)
Hartford-East Hartford-Middletown, CT (+7.47 percent)
Columbus, OH (+6.81 percent)
Los Angeles-Long Beach-Anaheim, CA (+6.20 percent)
Riverside-San Bernardino-Ontario, CA (+5.97 percent)

Rent Decreases

The following metro areas have experienced the largest year-over-year rental price percentage decreases through May 2023:
Austin-Round Rock-Georgetown, TX (-20.76 percent)
New Orleans-Metairie, LA (-20.42 percent)
Las Vegas-Henderson-Paradise, NV (-10.57 percent)
Houston-The Woodlands-Sugar Land, TX (-8.42 percent)
Seattle-Tacoma-Bellevue, WA (-8.28 percent)
Cincinnati, OH-KY-IN (-6.49 percent)
Phoenix-Mesa-Chandler, AZ (-6.46 percent)
Birmingham-Hoover, AL (-5.98 percent)
Memphis, TN-MS-AR (-4.85 percent)
Oklahoma City, OK (-4.44 percent)
Source: Rent.com

Multifamily Trends in Southern California

Sales and prices for multifamily apartment buildings have started to really fall in Los Angeles and other metropolitan regions across the nation. Specifically within Los Angeles, the number of units fell 11% in the first quarter of 2023 as compared with the previous fourth quarter in 2022. More shockingly, multifamily apartment building prices collapsed by -37.5% year-over-year as per a report shared by NAI Capital.

During the same first quarter time period, the average sales price per apartment unit dropped by 18.4%. One major factor for the falling price and sales volume numbers for Los Angeles County was directly related to the Measure ULA “mansion tax” that affected both luxury homes and commercial real estate properties priced above $5 million as of April 1st.

While $5 million may seem pricey for a luxury home in Los Angeles or elsewhere, the same $5 million dollar price tag for a rather small multifamily apartment building is much more common.

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Strangely, both vacancy rates and apartment rents continue to rise together at the same time in many parts of Los Angeles and elsewhere. Average rents rose to $2,156 per apartment unit in Los Angeles, a +1.9% year-over-year increase.

Some regions of Los Angeles had more negative rent, sales price, and vacancy trends. For example, the first quarter numbers for these Los Angeles multifamily submarkets were more negative than positive and were as follows:

  • San Fernando Valley and Santa Clarita Valley: The average multifamily sale price per unit fell by -35.9% year-over-year while the vacancy rates increased by +22%.
  • San Gabriel Valley: The average sales price per unit decreased by -20.3% while vacancy rates skyrocketed by +32.2%.
  • L.A. Westside: The average sales price per unit fell by -9.5% while vacancy rates increased by +10.7%.

Historically, rising vacancy rates and rental payment trends are usually inverse to one another like a seesaw with payments falling as vacancy rates rise. We shall see how long this trend lasts.

A very high number of landlords haven’t collected a rental payment for two or three years either, especially in Los Angeles County. When will the foreclosure and tenant eviction rates really begin to accelerate and adversely impact both tenants and landlords?

The Locked-In Homeowner and Unlocked Treasures

There are upwards of 16 to 20 million vacant or distressed properties across the nation. Additionally, there are millions of distressed FHA mortgages alone. Many homeowners haven’t made a mortgage payment for more than three years just like so many tenants.

Loan modifications, forbearance, and loan forgiveness plans continue at near record paces across the nation. Lenders are not filing foreclosure as aggressively as they would have in years past, partly due to ongoing pandemic restrictions in place. This is a major reason why the national home listing inventory supply is so low.

Another reason why there are so few homes listed for sale is because upwards of 92% of homeowners with a mortgage have an existing rate at or below 6%, as per a study released by Redfin. Let’s take a quick look below at the fixed rate estimates for homeowners as of the first quarter:

  • 91.8% of mortgaged homeowners have rates below 6%.
  • 82.4% of homeowners have rates below 5%.
  • 62% of homeowners have rates below 4%.
  • 23.5% of homeowners have rates below 3%.

It can be rather challenging for a homeowner to consider losing their 6%, 5%, 4%, 3%, or even 2% fixed rate mortgage with a 30-year term and move to another home with a rate closer to 7% or 8%. As a result, it’s referred to as the “lock-in effect” because so many homeowners don’t want to lose their near record rate locks.

The market may change for the better or worse later this year depending upon a few factors such as follows:

First, will future unemployment trends improve or get worse. A loss of income is generally the #1 reason why someone loses their home to foreclosure.

Second, will lenders and loan service companies start to file foreclosure notices at a much faster pace than in recent years?

Third, will tenant protections in place be eased up or tightened? Most landlords are small investors who may be fortunate to own just one or two rental properties. After months or years of no rent collected, the landlords may be at risk of losing their rentals and primary home to foreclosure.

Your key to future success that unlocks your potential as either a homeowner, investor, or tenant is to focus on the positives and negatives while minimizing your risk and maximizing your gains. With the right mindset and guidance, it will be akin to a literal key that unlocks a treasure chest!!!

Rick Tobin

Rick Tobin has worked in the real estate, financial, investment, and writing fields for the past 30+ years. He’s held eight (8) different real estate, securities, and mortgage brokerage licenses to date and is a graduate of the University of Southern California. He provides creative residential and commercial mortgage solutions for clients across the nation. He’s also written college textbooks and real estate licensing courses in most states for the two largest real estate publishers in the nation; the oldest real estate school in California; and the first online real estate school in California. Please visit his website at Realloans.com for financing options and his new investment group at So-Cal Real Estate Investors for more details. 

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.

The Unaffordable Housing Crisis

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By Rick Tobin

Can it be true that finding homes to live in using creative seller-financed transactions may soon become easier and more affordable than qualifying to lease or purchase a home with traditional financing options?

The typical home today is about $80,000 higher than it was just two years ago. The average monthly rent payment today is more than $1,000 higher than it was in 2020. Middle-income first-time buyers are unable to afford 70% of homes.

To qualify as a tenant, many landlords require that the tenant applicant’s income be three times the proposed monthly rent. In California where some average rents are $3,000 to $5,000 per month, the qualifying household income would need to be somewhere between $9,000 and $15,000 per month. Additionally, a significant deposit and the paying of at least one month’s rent upfront can be challenging for many tenant applicants.

Most Expensive Home Regions

San Diego is ranked as the #1 most expensive housing market in the nation, as per this U.S. News report. In more recent times in late 2022 and early 2023, San Diego’s home price-to-household income ratio almost reached an average of 15x (15 times), which is three times higher than the national average of 4x or 5x.

“In April 2023, the median listing home price in San Diego, CA was $999K, trending up 6.3% year-over-year. The median listing home price per square foot was $698. The median home sold price was $877K.” – Realtor.com

The main criteria for this Top 10 ranking of the most expensive cities in the nation included the median home price and average salary. In spite of using 2021 household price data, this analysis was recently published in May 2023 and is used as a forecast for the 2023 to 2024 years.

1. San Diego, CA

Average median home price 2021: $889,225
Average salary: $67,200

2. Los Angeles, CA

Average median home price 2021: $807,498
Average salary: $63,056

3. Honolulu, HI

Average median home price 2021: $581,658
Average salary: $61,860

4. Miami, FL

Average median home price 2021: $490,162
Average salary: $54,790

5. Santa Barbara, CA

Average median home price 2021: $464,954
Average salary: $62,020

6. San Francisco, CA

Average median home price 2021: $1,082,875
Average salary: $86,590

7. Salinas, CA

Average median home price 2021: $986,702
Average salary: $56,350

8. Santa Rosa, CA

Average median home price 2021: $828,156
Average salary: $64,080

9. San Juan, Puerto Rico

Average median home price 2021: Not Available (N/A)
Average salary: $31,650

10. Vallejo & Fairfield, CA

Average median home price 2021: $562,567
Average salary: $64,270

The ranking of Santa Barbara, California as #5 is a bit confusing because of the incredibly low median home price that is listed for this region. This data count estimate must take into consideration inland properties that are very far away from the ocean. Homes near the beach in this beautiful region are closer to $2 to $20 million.

Rising Household Income Requirements

Data provided by the California Association of Realtors (20% down payment and 30% front-end DTI or debt-to-income ratio estimates) for the following Southern California counties shows us how ridiculously high the household income requirements now are to purchase a median (or middle) price home based upon the rising mortgage rate trends:

Ventura County: A$205,200 household income is required to purchase an $828,750 home.

Los Angeles County: A $185,200 household income is needed for a $746,750 home.

Orange County: A $296,400 household income is required for a $1.2 million dollar home.

Riverside County: A $148,000 household income is needed for a $597,000 median home price.

San Bernardino County: A $115,200 household income would be needed to purchase a $464,500 home.

Please note that these “median” home prices are right in the middle of the county home averages. For properties close to the Pacific Ocean, the home prices may be 2, 3, 5, 10, 15, or 20+ times higher.

The average owner-occupant in recent years has used just 6% as a down payment instead of the 20% down payment number used for this California Association of Realtors (CAR) estimate. As a result, it’s more likely that the average loan amount for each borrower would be higher and also require mortgage insurance for loans above 80% loan-to-value (LTV). If so, the qualifying household income would probably be much higher than what’s listed on this county forecast estimate provided.

Disappearing Homeowners Insurance

In California, both State Farm and Allstate announced that they will no longer offer new homeowners insurance policies. In recent times, Geico closed down all of their California offices and Progressive stopped advertising in the state. The California FAIR Plan with limited coverage and higher costs than other plans, which is considered the last resort option for homeowners who can’t seem to qualify for other insurance plans, just announced another nearly 50% hike for their annual premiums.

Florida (#1 most expensive homeowners insurance state), Louisiana, Texas, and many other states are tightening up their insurance policy requirements as well or pulling out of these states, so it’s not just happening here in California. Some homeowners insurance policies in Florida are three or four times higher than the national average near $1,800 due to the extreme flood and weather risks there.

Right now, many insurance companies are focused more on not writing new homeowners insurance policies. What happens when some of them later change these restrictions to not allow the renewal ofactive policies?

More than 70% of all homes in California have a mortgage (lenders require active insurance in place to protect their interests also), which is higher than the national average. With fewer insurance plan options available, an increasing number of homeowners will be inspired to sell here in California, Florida, and elsewhere while pushing the listing inventory supply higher.

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Declining Purchasing Power for the Dollar

It’s not Americans “spending too much” that’s causing record inflation. Rather, it’s the combination of the record printing of dollars and the skyrocketing government debt spending that’s crushing the purchasing power of our dollar while making housing increasingly unaffordable to lease or purchase.

Generally, the loosening or tightening of the money supply is the root cause of periods of extreme inflation or deflation. For example, the M1 (cash, checking, etc.) money supply went from $4 trillion in January 2020 to $20 trillion in October 2021 in just 22 months. As the supply of new money reached the economy, the purchasing power of the dollar rapidly declined and fewer goods, services, and assets could be purchased with the same dollars as I’ve shared before.

Paying Loans Back

At some point, debts have to be paid back if the borrower doesn’t plan on filing for bankruptcy. This is true whether it’s an individual or a billion-dollar corporation with two billion in massive debt.

After more than three years of deferred student loan payments due to the pandemic declaration, millions of consumers will be faced with the reinstatement of monthly payment obligations for student loans starting in late August 2023.

Unpaid student loan debt reached more than $1.75 trillion and automobile loans surpassed $1.55 trillion by April 2023. It’s a $393 per month average payment for student loans. There’s another $1 trillion for all unpaid credit card debt at a 24% rate average.

Consumer spending usually represents about 70% of the US GDP (Gross Domestic Product). Student loans equal 7% of GDP. Approximately 64% of the $1.7 trillion in student loan debt has been in forbearance for the past three years, which equates to $1.1 trillion.

Millions of other homeowners haven’t made a monthly mortgage payment as well as far back as 2020. At some point in the future, mortgage lenders or loan service companies will also require the collection of monthly payments with or without a forbearance or loan modification plan in place.

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New FHA Bailout Loan Proposal

It appears that FHA is proposing a 0% interest 2nd loan bailout for the millions of their distressed mortgage borrowers who may be months or years behind in their payments. It’s called the Payment Supplement Partial Claim.

The previously proposed FHA bailout solution offered was a loan modification option which would have doubled or tripled the homeowner’s current rate while not dropping their payments at all. Again, there are millions of distressed FHA loans nationwide that are months or years behind.

Preparing for New Opportunities

As I shared in my previous article entitled A 33-to-1 Vacant & Distressed Home-to-Listed Home Ratio, there are potentially upwards of 18 to 20 million vacant (abandoned, 2nd, and rental homes) or distressed homes in the nation. If just a relatively small percentage of these homes are listed for sale or go into foreclosure, it may more than double or triple the national home listing supply while driving home prices downward.

If and when mortgage rates and other forms of consumer debt rates continue to rise right alongside the national home listing supply, an increasing number of sellers will welcome the creative seller-financed transactions that I share with my So-Cal Real Estate Investors Club members and with my real estate course students across the nation.

For example, how would you like to purchase a home with a minimal down payment, no formal loan qualification, and take over a 2.75% fixed mortgage rate payment that’s lower than a nearby rental?

Now is the best time to learn about creative real estate investment strategies that very few people truly understand well before the housing market begins to change direction yet again. Denial is no longer an option. If you’re the first person to go in a different direction than your competition, you’re more likely to be the first person to succeed due to your preparation.

Rick Tobin

Rick Tobin has worked in the real estate, financial, investment, and writing fields for the past 30+ years. He’s held eight (8) different real estate, securities, and mortgage brokerage licenses to date and is a graduate of the University of Southern California. He provides creative residential and commercial mortgage solutions for clients across the nation. He’s also written college textbooks and real estate licensing courses in most states for the two largest real estate publishers in the nation; the oldest real estate school in California; and the first online real estate school in California. Please visit his website at Realloans.com for financing options and his new investment group at So-Cal Real Estate Investors for more details. 

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.

A 33-to-1 Vacant & Distressed Home-to-Listed Home Ratio

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By Rick Tobin

Why are you just searching for listed properties for sale when the number of distressed, vacant, and “shadow inventory” homes is almost 33 times larger than the national home listing inventory supply?

How is this possible with my 33 number claim? First, upwards of 16 million homes were listed as “vacant” or shadow inventory in the fourth quarter of 2022, as per the U.S. Census Bureau, National Association of Realtors (NAR), and other groups. A vacant home can be defined as a vacation home, unsold new home building inventory (near record levels of new single-family homes and multifamily apartment buildings being built in 2023), distressed or pre-foreclosure properties, or homes held by billion-dollar corporations like BlackRock, Blackstone, or State Street for the long-term that just sit there with no intent to rent it out at present.

Second, there are at least a few million distressed mortgages (FHA loans, especially) currently in forbearance agreements in order to delay the lender’s foreclosure filing actions to bring the total to more than 18.5 million properties. Frankly, I think that the number is closer to 20 million after counting VA, conforming, non-QM, and private money loans, but we’ll just focus on the 18.5 million vacant or distressed home number.

Since 1934, FHA (Federal Housing Administration) has insured more than 40 million loans nationwide. Today, a relatively high percentage of homebuyers still rely upon FHA to purchase their homes partly due to the much lower interest rates and easier loan qualification guidelines such as loan programs which allow FICO credit scores as low as 500, debt-to-income (DTI) ratios up to 50% or higher, and loan-to-value (LTV) options near 96.5% to 100% LTV.

As of March 2023, the national home listing inventory was listed at 562,565 by data provided by the Federal Reserve Economic Data and the NAR. Let’s do the math as follows:

18.5 million distressed or vacant homes / 562,565 listed homes = 32.885 times

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Distressed FHA Loans & Continued Forbearance Extensions

There are three to four times as many delinquent FHA mortgage loans nationwide as compared to the entire national home listing inventory with somewhere near at least a few million distressed FHA loans.

February 8, 2023: Today, the U.S. Department of Housing and Urban Development (HUD) Secretary Marcia L. Fudge announced that, thanks to Federal Housing Administration (FHA) programs, approximately 2 million homeowners with FHA mortgages were able to stay in their homes from the beginning of the COVID-19 pandemic in March 2020 through December 2022 – when doing so was often a matter of life and death. During this period of time amid the pandemic, FHA borrowers whose ability to make their mortgage payments was impaired by the pandemic were able to obtain either a COVID-19 forbearance or a more permanent solution such as a loan modification that allowed them to avoid foreclosure.
Source: HUD Secretary Announces Major Milestone of Assisting Nearly 2 Million Homeowners Stay in their Homes

With a few million distressed FHA loans that they admit to and is probably undercounted, it’s no wonder why the federal government wants to keep offering FHA forbearance extensions.

Details of FHA’s COVID-19 Forbearance

Important information about FHA’s COVID-19 Forbearance:

To be eligible for the COVID-19 Forbearance or forbearance extension in the table above, you must request this relief from your servicer on or before May 31, 2023.

You can request a FHA COVID-19 Forbearance for up to 6 months. If needed, an additional 6 month extension may be requested. If you began your initial forbearance on or after October 1, 2021, you are only eligible for the additional 6 months if your initial 6 months forbearance will be exhausted and expires on or before May 31, 2023.

Additional forbearance options may be available to you after May 31, 2023. Your mortgage servicer may provide for a temporary pause or reduce your monthly mortgage payments to allow you time to overcome your financial hardship. An extended forbearance period may be provided to you if you are unemployed and actively seeking employment.

No extra fees, penalties, or interest will be added to your account during the forbearance period.

Source: U.S. Department of Housing and Urban Development (HUD)

There are also a significant number of distressed VA and conforming or conventional loans nationwide which are held by Fannie Mae or Freddie Mac in the secondary market that aren’t really being “officially” counted with the most up to date numbers. FHA and VA mortgage loans have both consistently represented close to 10% each of the annual national funded loan market. As a result, these government-backed or insured loans, which typically average close to 0% to 3.5% down payments for FHA, VA, and conforming, are something to keep a close eye on as the economy continues to soften.

The 40-Year Loan Modification Program for FHA Borrowers

Good news: National mortgage delinquency rates dropped 15% in March 2023 while reaching 2.92%, which was a new all-time record low.

Bad news: Millions of distressed mortgages are not being counted as “delinquent” once they enter forbearance agreements with their lender (FHA loans, especially). The national FHA loan default rate reached 12% in February and will likely continue to rapidly increase. Distressed FHA and VA loan investments are some of the best deals out there because they usually have the lowest mortgage rates that you can take over by way of creative seller-financing techniques.

A forbearance agreement is when the lender or mortgage loan servicing company agrees to postpone or delay their foreclosure actions with the delinquent borrower. Sometimes, these foreclosure postponements may last months or years.

On March 8, 2023, HUD issued their Mortgagee Letter 2023-06 with details described as the “Establishment of the 40-Year Loan Modification Loss Mitigation Option” with a stated purpose noted as “This Mortgagee Letter (ML) establishes the 40-year standalone Loan Modification into FHA COVID-19 Loss Mitigation policies.”

Several mainstream media analysts mistakenly described this new 40-year loan proposal offered by FHA as a purchase loan as well. Yet, this is not correct because it’s only for the refinance of currently distressed 30-year FHA loans into longer 40-year loan terms in order to reduce the monthly payments for borrowers. There is no published word about whether FHA will later consider offering 40-year purchase loans for borrower prospects.

Housing and Family Trends

Real estate is a people business, first and foremost. The #1 most important factor for housing trends is related to population trends and household formations for families especially. Without people, there’s no need for housing regardless of the affordable financing offered.

One of the main reasons why people purchase single-family homes is because they’re trying to either build a growing family or the need to house two or three generations of the family under the same roof. You can’t spell “single-family homes” without family in it.

The U.S. has the highest percentage of one-person households in the entire world. A few years ago, one-person households surpassed all other household formations in Canada.

In 2022, only 24% of U.S. households had at least one child under the age of 18. In 1965, upwards of 42% of households had a child under the age of 18.

The Decline of Family Households

Here are some of the published data numbers from sources such as the U.S. Census Bureau, the National Center for Health Statistics (NCHS), Pew Research, and numerous other data sources in regard to individuals and family structure trends:

  • National overall divorce rate in the USA: 50%+.
  • The California divorce rate is 60%.
  • The Orange County, California divorce rate is 72%.
  • 41% of first marriages nationwide end in divorce.
  • 60% of second marriages end in divorce.
  • 73% of third marriages end in divorce.
  • The average length of a marriage in the U.S. that ends in divorce is 8 years.
  • There is one divorce every 36 seconds in the U.S. on average; 2,400 divorces per day; 16,800 divorces per week; and 800,000 to 900,000 divorces per year.
  • The percentage of American men between the ages of 20 and 39 who are now married has fallen by half (35% of men are married as of 2017) since the early 1970s (70% of men were married).
  • Unmarried parents who live together are more likely to break up than married parents, per the Brookings Institute.
  • Per the CDC in 2016 through at least 2020, U.S. fertility rates were the lowest ever recorded as fewer couples are having children these days. Each consecutive year over the past five or six years reached all-time record lows.
  • 78% of all households in the U.S. contained one married couple in 1950. Today, married households are below 48%.
  • In 2010, the Pew Research Center reported that 44% of Americans polled in the 18-to-29 year old age range believed that “marriage was becoming obsolete.”
  • Divorce rates for people over the age of 50 have doubled between 1990 and 2015, per Pew Research Center.
  • In 1956, roughly 5% of all babies were born to unwed mothers. Between 2008 and 2016, babies born to unwed mothers were closer to the 40% range.
  • Upwards of 50% of children in impoverished regions of the U.S. live in homes without fathers.
  • 46% of children live at home with a mother and father who were in their first marriage together.
  • The average American woman in 1970 had her first child at 21.4 years of age. Today, the woman is near 25.6 years of age.
  • The U.S. has the highest teen pregnancy rate in the industrialized world.
  • More than 50% of children are born to unmarried women under the age of 30.

Saving Equity or Creating Newfound Wealth

What are your options as either a homeowner with an ongoing forbearance agreement in place with your lender, a struggling business owner, a commercial property owner and landlord with incredibly high vacancy rates, or as an investor seeking new opportunities if and when the economy suddenly pivots and we enter a more clearly visible deeper recession? If home values are more likely to be higher today than later this year, is it now a good time to sell? If so, where will be your next destination for a home?

Generally, loss of income is the #1 reason why homeowners lose their homes to lenders or mortgage loan service companies in foreclosure. The #2 reason why homeowners walk away from their home is when the mortgage debt exceeds the current market value and it’s upside-down or underwater. This is when short sale options become more prevalent.

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The real risk associated with homes purchased in recent years is related to the relatively low down payment averages for first-time buyers and others that were leveraged between 96.5% and 100% loan-to-value at the close of escrow. Effectively, these homebuyers were upside-down with negative equity at closing when factoring in the potential 6% to 8% closing costs to resell the homes after paying real estate brokerage commissions, title, escrow or attorney’s fees, transfer taxes, third-party inspection reports, and possible seller credits towards the buyer’s closing costs.

In 2022, first-time homebuyers represented 34% of all home purchases across the nation, as per the NAR. During the fourth quarter of 2022, purchase loans comprised 78.6% of all FHA mortgages funded. With a high percentage of FHA borrowers reported as first-time homebuyers, their average down payments were likely close to 3.5% or below. What happens if home values fall 5%, 10%, or more in value over the next year?

If you’re currently in a distressed mortgage situation as a homeowner or investor or are searching for discounted off-market listings as a buyer with very creative and flexible financing solutions, I can show you effective ways to save your equity or create newfound wealth with my mortgage and investment business named Realloans (Real Estate Loans and Creative Sales) and my real estate group linked here: So-Cal Real Estate Investors.

Rick Tobin

Rick Tobin has worked in the real estate, financial, investment, and writing fields for the past 30+ years. He’s held eight (8) different real estate, securities, and mortgage brokerage licenses to date and is a graduate of the University of Southern California. He provides creative residential and commercial mortgage solutions for clients across the nation. He’s also written college textbooks and real estate licensing courses in most states for the two largest real estate publishers in the nation; the oldest real estate school in California; and the first online real estate school in California. Please visit his website at Realloans.com for financing options and his new investment group at So-Cal Real Estate Investors for more details. 

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.

The Interconnected California & Global Real Estate Markets

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By Rick Tobin

Did you know that the median Southern California and statewide home prices have fluctuated between the $750,000 and $850,000 range over the past year? Generally, the housing price-to-household income for California has varied between 8x to 10x (times or multiplied) for home prices as compared to the qualifying household income. For example, a home with a purchase price of $800,000 is 10 times (10x) the combined household income of $80,000.

While California is usually one of the most expensive places in America to own or lease a property, it’s still “affordable” in comparison to these Top 10 most expensive home price-to-household income locations on the planet which are as follows:

#1 Shanghai, China – 46.6x
#2 Beijing, China – 45.8x
#3 Hong Kong, China – 44.9x
#4 Colombo, Sri Lanka – 43.7x
#5 Beirut, Lebanon – 41.3x
#6 Shenzhen, China – 40.1x
#7 Manila, Philippines – 37.6x
#8 Guangzhou, China – 37.3x
#9 Mumbai, India – 36.6x
#10 Ho Chi Minh City, Vietnam – 34.5x
Source: Numbeo – Property Price Index 2023

The Top 10 priciest home regions have both skyrocketing home prices and annual wages that are extremely low which makes California and the rest of our nation seem reasonably priced when reviewing home price-to-income ratios.

The California economy is now the 5th largest economy in the world. Our economy is on a growth pace that may soon make it the 4th largest economy if our state surpasses Germany. We attract investors and new residents from around the world such as from Asia, Europe, Mexico and Latin America. In fact, there are more Hispanics or Latinos in California as of 2015 than any other race or ethnicity.

The Southern California (So-Cal) region within our state consists of upwards of 24 or 25 million residents located in 10 counties which include: Imperial, Kern, Los Angeles, Orange, Riverside, San Bernardino, San Diego, Santa Barbara, San Luis Obispo, and Ventura.

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So-Cal and U.S. Real Estate Trends

In the So-Cal Real Estate Investors – Canyon Lake group that I lead, we discussed the following real estate and financial topics at our latest in-person meeting at Canyon Lake Golf & Country Club on April 18th, 2023:

1. Home values over the next year could fall, be flat, or even increase if the Fed is forced to pivot and start rapidly cutting rates again. Be prepared for any and all investment possibilities and opportunities.

2. Home equity represents the core wealth: The bulk of a homeowner family’s overall net worth comes from the equity in their primary residence. The average US homeowner at retirement age has approximately 83% of their overall net worth tied up in the equity in their home and pays monthly expenses from the remaining 17% of overall net worth that’s held in checking, savings, or pension accounts.

3. Riverside-San Bernardino-Ontario, CA Metro Area (March 2023)

  • Home Value: $542,000
  • Median Household Income: $77,095
  • Home Price to Household Income Ratio = 7.03x (5x is national avg.)
  • Home Value Growth (Year-over-Year or YoY): 3.0%
  • For Sale Inventory: 7,511
  • Sales Inventory Growth: 71.1% YoY
  • Price Cut Share of Listings: 16.8%
  • Rent for Apartments: 2,494/mo.
  • Monthly House Payment: $3,426 (PITI)
  • Rent for Homes: $3,243/mo.
  • Monthly Difference Between Home Mortgage and Rent: $183
  • Listing Inventory as % of All Homes: 0.5%
    Sources: Realtor.com, Zillow, and US Census Bureau

“The difference between monthly mortgage payments and rents hasn’t been this big since 2006, around the peak of the housing bubble that led to the Great Financial Crisis, according to the National Multifamily Housing Council. Assuming a 10% down payment, the group found that a monthly payment on a 30-year fixed-rate mortgage was $1,176 more than renting an apartment up to the end of 2022. The buy-to-rent premium hasn’t been this steep since the third quarter of 2006.” – Business Insider

The exception to this current massively widening mortgage payment-to- rent trend is Riverside Metro with only a $183 monthly price difference.

4. Lack of a sufficient down payment is the most common reason why an individual or family can’t qualify to purchase a home unless they can qualify for a VA loan or even FHA loan with $0 down after factoring in seller credits and gift money. There are at least 311 down payment assistance (DPA) programs available to California residents and upwards of 2,300 DPA programs available nationwide, as per the Down Payment Resource group. Yet, many people are only familiar with the California Dream DPA program that had $300 million already committed to buyers in just the first 11 days before it shut down. Originally, the plan was for California to offer first-time buyers up to $500 million, but the state had to use $200 million of those earmarked funds to cover other budget deficits.

5. Short-Term Rentals: Coachella Valley had the highest March/April 2023 ADR (Average Daily Rent) of the top 50 short-term rental markets partly due to the Coachella and Stagecoach music festivals; U.S. short-term rentals earned over $62 billion in revenue in 2022, which was a 25% year-over-year increase; San Diego was the most profitable Airbnb metropolitan region in the world in 2021; Big Bear City was ranked #8 in the entire world for highest-grossing Airbnb revenue in 2020; and Moreno Valley was the most profitable Airbnb city in the U.S. in 2019.

Investors can qualify with as little as 15% cash down using DSCR (Debt Service Coverage Ratio) programs where the current or proposed rents cover the proposed monthly mortgage payment (PITI and HOA, if applicable) on an EZ-Doc type of basis.

Flipping homes or paper: With even shorter term real estate options that may be be completed within hours or days, you can either flip properties or paper such as lease-options, wholesale purchase contract assignments, seller-financed notes or deeds, or partial income streams from beneficial or lender interests in the promissory note (“IOU for debt”) or trust deed.

6. Distressed mortgage and rental property data from 2021. Today’s 2023 numbers are probably significantly worse and rarely published.

  • An estimated 15 million people lived in households that owed more than $20 billion in unpaid rent as of July 2021.
  • 7.43 million rental property units were not current.
  • 5.95 million owner-occupied housing units weren’t current.
  • 8.71 million lived in owner-occupied homes where the homeowners have little or no confidence in their ability to pay their mortgage.
  • 12.71 million lived in rental properties where the heads of household had little or no confidence in their ability to pay their rent.
  • Serious mortgage delinquencies were up 20% in July from June and were the highest recorded since 2010.
  • By mid-August 2021, 3.9 million homeowners were in active forbearance, which represented 7.4% of all mortgages nationwide and $833 billion in total unpaid principal.
  • An estimated 11.6% of all FHA and VA loans were in active forbearance.
    Sources: U.S. Census Bureau and Black Knight Mortgage Monitor

7. 2023 Consumer Debt Data and Trends: It’s claimed that upwards of 15,000 cars are repossessed every single day here in the U.S. alone. Mortgage and all consumer debt and payment rates and fees all just hit record highs at the same time. Average DTI (debt-to-income) ratios for existing mortgage borrowers reached an all-time record 44% DTI and FHA defaults reached almost 12% in February 2023.

Average interest rates (March ‘23):
– Credit Card: 24.5%
– Used Cars: 14.0%
– New Cars: 9.0%

Meanwhile, we have record levels of debt:
– Total Household Debt: $16.5 trillion
– Auto Loans: $1.6 trillion
– Credit Card Debt: $986 billion
– Student Loans: $1.6 trillion

The interest on student loans has been suspended since 2020 due to Covid, but is set to resume later this year. How many defaults will happen?

8. Understanding Credit: FICO scores range from 300 to 850. The higher the score, the better the credit grade. The three main credit bureaus or credit reporting agencies (CRAs) include Experian, TransUnion, and Equifax. The credit scores are derived from the following factors:
● Payment history—35%
● Amount owed—30%
● Length of credit history—15%
● New credit—10%
● Types of credit used—10%

New Credit Score Models: The average American has a FICO credit score near 690. In October 2022, the Federal Housing Finance Agency (FHFA) announced the approval of a new credit score rating system named FICO 10T and VantageScore 4.0 for use by Fannie Mae and Freddie Mac. FICO 10T and VantageScore 4.0 will consider payment histories from rent, utilities, and telecommunication bills. Yet, a rental payment history can be very bad for tenants on Covid moratoriums with years of no payments.

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9. Generational Home Purchase Trends: Between 2015 and 2022, the Millennial generation was ranked #1 overall as the largest generation of home buyers and tenants. Now, Baby Boomers (born between 1946 and 1964) take back the lead as the #1 home buyers partly due to having more cash and equity available from other properties. Senior housing and reverse mortgage opportunities are rapidly increasing as well.

“Baby boomers now make up 39% of home buyers – the most of any generation – an increase from 29% last year. Generation Z now makes up 4% of buyers, with 30% of Gen Z moving directly from a family member’s home into homeownership. When relocating, all generations are moving farther distances, with younger boomers (ages 58-67) moving the greatest distance at a median 90 miles away.” – National Association of Realtors

10. Ballooning Commercial Loans: $270B of commercial real estate loans are set to mature in 2023, which is an all-time record for loan maturities. An estimated $900 billion in commercial property loan debt may come due within just the next two years. If so, upwards of $630 billion dollars’ worth of commercial loans may come due in 2024 which would be 2.333 times the all-time ballooning commercial record loan set this year. How will this potentially affect commercial property value trends?

For more details, please visit www.socalrealestateclub.com.

Rick Tobin

Rick Tobin has worked in the real estate, financial, investment, and writing fields for the past 30+ years. He’s held eight (8) different real estate, securities, and mortgage brokerage licenses to date and is a graduate of the University of Southern California. He provides creative residential and commercial mortgage solutions for clients across the nation. He’s also written college textbooks and real estate licensing courses in most states for the two largest real estate publishers in the nation; the oldest real estate school in California; and the first online real estate school in California. Please visit his website at Realloans.com for financing options and his new investment group at So-Cal Real Estate Investors for more details. 

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.

Distressed Properties & Contradictory Data

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By Rick Tobin

The published economic numbers that we see daily or weekly don’t necessarily reflect the reality of what’s going on with the job market, financial markets, and housing sector, especially. Reality can be a bitter pill to swallow, figuratively. Is our economy still booming, starting to soften or flatten, or is it turning negative?

The mainstream media likes to share economic data that’s published by the federal government which seems completely disconnected from reality. While we see articles published weekly about massive layouts from well-known companies like Amazon, Walmart, Disney, PayPal, Zoom, Dell, IBM, Microsoft, Google, Salesforce, Vimeo, Coinbase, and Goldman Sachs, we also see published unemployment data that’s claimed to be near historical lows. These massive layoffs and “near historical low unemployment” numbers seem to be contradictory to one another as they can’t both be true at the same time.

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What about housing? In early 2023, we are still seeing all-time record highs for median rents and median home prices in most regions of the country. Yet, we’ve also seen mortgage rates increase by two or three times above peak lows as last seen in late 2021 and the 1st quarter of 2022.

Generally, the booming or busting housing markets are tied directly to mortgage rate trends and whether or not loan underwriting is easing or tightening. How can property values still be peaking while we’ve also possibly seen the fastest increase with short-term and long-term rates in US history at the exact same time? This is another fine example of a contradictory marketplace with two extreme opposites at the same time.

Bubble Burst and Suppressed Housing Supply

For many of us, the absolute worst housing market bubble burst that we experienced firsthand was back in 2008. In California and many other states, the housing market started to peak in late 2006 or 2007. The catalyst for this peaking housing market bubble burst was directly related to the Federal Reserve’s aggressive rate hike campaign over the period of 24 months between June 2004 and June 2006. The Fed raised rates a total of 4.25% from 1% to 5.25% with 17 separate rate hikes.

Because so many borrowers were in adjustable rate mortgages or home equity lines of credit, the mortgage payments began to double or triple for property owners after these 17 rate hikes. As a result, the number of distressed or foreclosure properties reached several million with a high percentage located in California and other Sun Belt states like Nevada, Arizona, and Florida.

Let’s take a look at the worst bubble burst year ever in US history to better understand how bad the price collapse was in 2008:

● Home prices fell in 35 states.
● California had the biggest price collapse at -29.6%.
● Nevada had the 2nd biggest price drop at -22.8%.
● Arizona fell -19%, Florida dropped -18.2%, and Rhode Island fell -13.7%.

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Even worse, California home prices fell a total of -42% off their previous bubble peak. Nevada’s median price dropped -39% from their peak. Both Arizona and Florida fell -33% from their respective previous market peaks.

Because the number of distressed properties increased so dramatically, a very high number of lenders did not start the foreclosure process even if the borrowers were several years behind on their mortgage payments. If a lender or mortgage loan servicer did initiate the foreclosure and take it all the way to the final auction sale, millions of these properties were not placed up for sale as they became a massive shadow inventory of unoccupied homes.

Many lenders did not want to acknowledge or share how bad their non-performing loan portfolio was at the time with their stockholders, equity partners, or derivatives investors. If the lenders did foreclosure on every delinquent mortgage in their portfolio, it might financially crush the same lender. As a result, it wasn’t unheard of to read about homeowners in Beverly Hills mansions with $5 million loans who hadn’t made one mortgage payment in three years or longer.

The same thing is happening today here in 2023. Lenders aren’t starting the foreclosure process as often as they’re legally entitled to due to borrowers not making payments for months or years. It’s also been claimed by many people that the current number of millions of empty shadow inventory homes that are not currently listed for sale may exceed the total number of all homeless people nationwide. Whether this claim is accurate or not as it would be incredibly challenging to prove, our current listing home supply nationwide is still near historical lows.

For those people who claim that the housing market is busting, home prices nationwide increased by +10.1% year-over-year through October 2022 in spite of mortgage rates doubling or tripling in less than a year, according to CoreLogic. This home price “slowdown” is still almost two or three times higher than historical annual price gains.

Record High Consumer Debt & Rents

Total credit card debt reached a new record high of $930.6 billion in the fourth quarter of 2022, according to data released by TransUnion. At the same time, credit card rates and fees reached all-time record highs with average annual rates exceeded 20% for many consumers.

Consumer credit spending fell by a whopping 65% from November ($33.1 billion) to December 2022 ($11.56 billion) in spite of it being the traditionally peak holiday spending month. This is a potential major warning sign that a high percentage of consumers are tapped out and/or their credit card lenders are starting to drastically reduce the borrowers’ ceiling limit.

Several published economic surveys discovered that most of the polled consumers did not have $500 as cash available to cover any unexpected financial emergencies like with medical bills, rising utilities, or skyrocketing grocery costs. One of the most important pieces of information about the health of the economy is directly related to the typical consumers’ cash reserves. When access to cash is near historical lows and rents and mortgage payments are at historical highs, then something has to give at some point.

How can people qualify and afford these astronomical rents for just a 1-bedroom apartment that are listed below? Please keep in mind that many landlords want to see their tenant applicants have gross monthly income that is at least three times the proposed rent. For places like New York City, this would be equal to $11,370 in gross income to qualify for a typical one bedroom apartment that’s leasing for a median of $3,790 per month.

Top 5 Most Expensive Rent Cities (1-Bedroom Apartment)

1. New York, NY: $3,790
2. Boston, MA: $3,000
3. San Francisco, CA: $3,000
4. Miami, FL: $2,660
5. San Jose, CA: $2,540
Source: Boardroom

In many regions, the monthly rents are higher than the median mortgage payments. This trend is unlikely to continue onward as mortgage rates rise and rents start to flatten or fall.

Rising Rates and Distressed Properties

In some metropolitan regions like Los Angeles, they’ve had two and three year long moratoriums that protect tenants from paying their rents due to the Covid issue. Most landlords are small “Mom and Pop” type landlords who may be fortunate to own just one or two rentals. If their tenants haven’t paid rent in two or three years, then the property owner may default on their own mortgage and lose it to foreclosure, sadly.

Lenders and loan service companies will likely start to accelerate their foreclosure filings later this year. If so, this can be traumatizing for the distressed homeowners who may soon lose all of their equity and their roof over their head. At the same time, it can be an investment opportunity for others who keep their eyes open for bargain deals.

As of February 10, 2023, the Fed Funds Rate is at 4.58%. Some financial analysts think that the Fed may take their core rate up to 6% or higher later this year and keep it there for a relatively long period of time. If so, how will existing homeowners and buyer prospects be able to afford higher payments?

Many savvy real estate investors and licensees are now starting to describe early 2023 as a bit reminiscent of 2008. Yet, many others will say that the “the relatively low available supply home listing inventory” will protect us from any sort of a double-digit price collapse. While this may be very true and the Fed may be forced to suddenly start cutting rates in the near future if the economy really weakens, what happens if the shadow inventory is slowly released to the general public and the tenant and foreclosure moratoriums are lifted?

With any perceived positive, neutral, or negative situation, it’s usually very wise to focus on potential solutions for as many possible housing trends that may or may not happen in the near future. Few of us like to actually address possible negative situations as we remain stuck in the state of denial and cognitive dissonance where two contradictory situations must both be right at the exact same time even though they can’t both be true. What we avoid in life controls us, so we must face our fears head on and stay focused on the opportunities or solutions.

Rick Tobin

Rick Tobin has worked in the real estate, financial, investment, and writing fields for the past 30+ years. He’s held eight (8) different real estate, securities, and mortgage brokerage licenses to date and is a graduate of the University of Southern California. He provides creative residential and commercial mortgage solutions for clients across the nation. He’s also written college textbooks and real estate licensing courses in most states for the two largest real estate publishers in the nation; the oldest real estate school in California; and the first online real estate school in California. Please visit his website at Realloans.com for financing options and his new investment group at So-Cal Real Estate Investors for more details. 

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.